Treasurys gain on month-end buying, add to January advance

DeborahLevine

NEW YORK (MarketWatch) -- Treasury prices turned higher on Friday, pushing yields down, as U.S. stocks gave up gains and analysts pointed to traditional month-end buying by bond investors to match benchmark indexes.

Bonds were under pressure earlier due to better-than-expected economic data. Treasurys are headed for a small weekly loss, the first in four weeks, as the market digested $114 billion in government debt sales and the Federal Reserve's first policy statement of the year was interpreted as more upbeat on the economy.

Yields on 2-year notes
TMUBMUSD02Y, -0.79%
declined 3 basis points to 0.83%, after also being higher in early trading. Last Friday, the notes yielded 0.81%.

"There may be some caution ahead of month-end duration extensions capping yields for the moment," according to Action Economics.

Many fund managers purchase debt in the final days of each month to match new issues that become included in benchmark indexes, which tend to extend the duration of portfolios. Duration is a measure of the sensitivity of the price of a fixed-income asset to a change in interest rates, and it's partially determined by maturity.

Strong data

Treasury yields reached the highs of the session just after the Commerce Department said U.S. gross domestic product increased at a 5.7% seasonally adjusted annual rate in the last three months of 2009. Nonetheless, U.S. stocks turned lower in afternoon trading, with some analysts pointing to concerns of whether that growth can be sustained. See more on GDP.

"We remain concerned about a slowdown later in 2010 and a the beginning of 2011 as monetary and fiscal stimuli wear off, tax rates head higher and a stagnant labor market weighs on personal income and thus spending plans," said Dan Greenhaus, chief economic strategist at Miller Tabak.

"As a proud member of the W-shaped recovery camp, we must continually point out that the middle of a W-shaped recovery is an improvement," he said in an email. "That is what we are experiencing now."

A separate Labor Department report said employment costs increased 0.5% in the fourth quarter, a little more than economists anticipated. Still, the cost of employing a worker in the United States rose at the slowest pace on record in 2009. See more on employment-cost index.

The employment-cost data offset some cheer of the strong GDP growth, because it's a key indicator of wages watched by Federal Reserve policy makers.

"The highest unemployment rate in nearly 30 years is suppressing wage growth with a vengeance, and is likely to continue to do so in the coming quarters," analysts at Wrightson ICAP wrote in a note. "This particular part of the economic slack story is likely to argue for an accommodative Fed policy stance for some time to come."

Also weighing on bonds, a report from Reuters/University of Michigan said U.S. consumer confidence improved more this month than previously estimated. Its sentiment index rose to 74.4 this month, from a previous estimate of 72.8. Economists surveyed by MarketWatch expected an increase to 73.0 in the final numbers. Read more on consumer sentiment.

Treasurys were under slight pressure before the data as news reports pointing to euro-zone support for Greece if the country's financial system deteriorates and requires it.

"We had three auctions this week, none of which were eye-poppingly cheap, yet they went fine with decent non-dealer interest," said strategists at CRT Capital Group. "Someone out there likes Treasurys."

Still, bonds are up for the month, which analysts attribute to some give-back of the move to higher yields in December, and some reconsideration of optimism for the economy's growth potential amid very mixed economic data.

"The risk of tighter policies in China [and other Asian nations besides Japan], which are considered to be the engines of global growth, has caused many investors to reduce risk," strategists at Morgan Stanley wrote in a note. "Sovereign risk events in Greece and the unknown variables surrounding tighter banking regulations in the U.S. have caused a further unwind of risk."

Yields on two-year notes, more attractive to investors looking for safer holdings, have fallen in January by the most since December 2008.

Treasurys of all maturities returned 1.29% this month, according to an index compiled by Bank of America's Merrill Lynch unit.

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